US FED RESERVE - NO RATE HIKE SEEN

By Ruma Dubey

The Indian markets are once again single-mindedly fixed to what the US Federal Reserve will do. It is like currently we do not have a single trigger, everything depends only and only on the US Fed.

This growing perception of being interlinked with the US is truly baffling. The stock market, the pure icon of capitalism is moved purely by sentiments – economics, fundamentals and all other things come much later. That is the underlying truth – markets are driven only by sentiments. And currently we do not have a single trigger; nothing really to look forward to which is why we have these dates – FOMC meet, RBI meet, WPI, IIP and et al.

This FOMC meet scheduled for midnight tomorrow is important, sure. It is after all about whether or not USA will hike interest rates. So let us assume that it does hike rates. At the most, it could be a 25 bps rate hike. Would that be so earth shattering that it could knock the bottom off the markets? Really?

Well, if it is about sentiments, doesn’t a rate hike mean good news – US economy is truly on the recovery path and is doing well? That is a much bigger and better news than the fact that rates were kept at same near zero levels.

And that is the news that we need to pay attention to. In fact on that front, currently things do not look very good which again are pointers to the fact that tomorrow’s Fed meeting with be a non-event; there would be no rate hike.

There are reports suggesting that for the first time since the recession, quarterly profits and revenues of big American companies are expected to fall. Many have announced a pullback in spending. Caterpillar, which is considered to be the indicator of the capital goods sector, reduced its profit forecast, stating that demand was weak for its heavy equipments. 3M Co is laying off 1500 or 1.7% of its total employees as growth sagged. According to Reuters, profit and revenue are falling in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter.

And news is not too good from the UK too. As per Ernst & Young, 79 UK listed firms posted a profits warning in the third quarter, 40% more than in the previous period.  

This means things are not really as great as we perceive it to be. Q3 is seasonally the weakest for industrial goods, IT included due to the festive season. And with companies cutting down or issuing profit warnings, clearly the US economy at this juncture at least is not yet out of the woods.  Given this situation, it seems highly unlikely that the Fed would do anything at the meet tomorrow.

So lets be very logical about this day tomorrow. The Fed needs to do what it see’s befitting its country and India, directly will not face a hit. As we keep on reiterating, the entire market runs on sentiments. If the moods turnaround, all this gloom will overnight turn into boom. And to change those sentiments, we need some stimulus, some policy announcement which will buoy the sentiments.